OPTIMAL COPYRIGHT TERM SONGS, COMPOSITIONS, RECORDINGS

BASICS Copyrights create little monopolies over the term of the right Profits are higher and a “productive” deadweight loss (DWL) is generated Economic surplus increases, since it is 0 if the work is not created, despite the DWL When copyrights expire, the work enters the public domain Monopoly profits disappear Economic surplus increases How to create an incentive for the creation of new works while maximizing economic surplus?

COPYRIGHT INCENTIVES To create a new work, the creator must anticipate Economic Profit ≥ 0 Typically, there is a fixed cost, FC, to create the work FC is often an opportunity cost When the work is utilized, it generates revenue and variable costs (P – MC)Q Copyright protected works will be produced as long as (P – MC)Q – F ≥ 0

FLOWS OVER TIME Fixed costs are incurred at the beginning, but revenues and marginal cost are realized over time The time value of money must be taken into account A dollar today is worth more than a dollar a year from now To compare net revenues to fixed cost, the net revenues must be discounted by finding the present value PV = Σ[{(P i – MC i )Q i }/(1 + r) i ]

EXAMPLES OF PRESENT VALUE CALCULATIONS PV = Σ[{(P i – MC i )Q i }/(1 + r) i ] PV = [$10,000/(1.12)] + [$20,000/(1.12) 2 ] + [$50,000/(1.12) 3 ] + [$75,000/(1.12) 4 ] + [$50,000/(1.12) 5 ] = $136, The discount rate, r, is 12% in this example The discount rate and the time period affect the present value $1,000 in 50 years at r = 5% has a PV = $87.20 In 70 years, the PV = $32.87 $1,000 in 50 years at r = 10% has a PV = $8.52 In 70 years, PV = $1.27

IMPLICATIONS FOR COPYRIGHT A new work is created if PV T (PS) – F ≥ 0 Where PS is producer surplus = (P – MC)Q T is the copyright term Economic Surplus ES = PV T (ES M ) + PV T+1 (ES C ) ES M = ES C – DWL is monopoly economic surplus ES C is competitive (P = MC) economic surplus Choose T to maximize Economic Surplus Minimum T consistent with creation since ES M < ES C Choose T for which PV T (PS) = FC (see graph)

MYOPIC VIEW OF INCREASING T As T increases PV(PS) increases, PV(PS) > F More works are created ES declines as periods of ES C are traded for ES M Both PS and ES changes may be so far in the future as to have little effect $1,000 in 100 years at r = 5% is worth $7.60 $1,000 in 100 years at r = 10% is worth $0.73

OTHER FACTORS If more works are created NOW because T increases, then PS and ES increase immediately (graph) Entry of new works may reduce PS and ES of existing works through competition Net effect is unclear Increasing T for existing works seems to raise PS and reduce ES, soon for some works Unless this prompts investment in these works that extends their value Efficient management of existing works Would producers be more likely to produce a film about a popular character if they could buy exclusive film rights to it?

EVIDENCE FOR COMPOSITIONS AND RECORDINGS Most works are uneconomic and do not benefit from copyright extension No apparent shortage of people striving to become songwriters and entertainers Technology has reduced FC for music and increased creation of new works anyway Benefit of term extension seems to go to those owning large catalogs of older “hits” and/or expecting to own hits in the future